Category: Investments

Many investors are familiar with the concept of risk vs reward. There is risk in any investment, whether large or small. For bearing that risk, you expect a return that compensates potential losses.

In theory, the higher the risk, the more you should receive for holding the investment, and the lower the risk, the less you should receive.

High-risk investments can come in many different forms; some examples of high-risk investments include cryptocurrencies, options, forex, starting a business and venture capital. Although the potential return of these high-risk investment assets are higher, one must always be aware that they carry a higher possibility of losing money as well.

As an investor, one must always look at the big picture and decide what is your investment objective and your investment duration. Examples of common investing objectives for investment can include:

• Building a passive income stream
• Retirement planning
• Children’s tertiary education
• Purchasing a property

Before investing, remember to ask yourself three things:

1. What are you investing for?
2. Can I afford to lose this money? 
3. Is it for short term (1-3 years), medium term (5-10 years) or long term, (>10 years)? 

Different investment objectives would determine if high-risk investments are suitable for you. For example, a retiree would generally be more concerned about preserving his accumulated wealth rather than risking his capital.

Read : 5 Drawbacks Of Unit Trusts Investment That You Should Know Before Investing

He would be more focused on ensuring his accumulated wealth will be sufficient to maintain his desired lifestyle for the rest of his life rather than risk it to get higher potential returns. Thus, high-risk investments might not be suitable here.

Another example would be children’s tertiary education. When investing for children’s tertiary education, one would not want to take too much risk as any reduction in the value of the investment due to market fluctuations might mean that the child has to delay their education, or in the worst scenario, there might not be enough for them to continue their tertiary education.

Millennials As A Case Study For High-Risk Investments

As of 2021, millennials and Gen Z now make up the largest demographic in the workforce. As their disposable income increases, they would have more surplus income to invest. One observation I have made is that younger investors are more inclined towards higher risk investments.

This is probably not due to higher risk tolerance, but because they want to achieve their goals faster. For a generation used to instant gratification, waiting for one year to get 1.8% return on a fixed deposit is much too slow!

Fear of missing out (FOMO)

Millennials and Gen Z have grown up in the age of social media and one impact of that is the desire to keep up with their peers. Seeing the luxurious lifestyles of their peers may make some millennials want to take on higher risk as a method to grow their wealth. Do remember that what we see on Instagram and Facebook may not reflect reality, and taking excessive financial risk just to keep up is unwise.

Read : Why The Best Investment On Earth Is Earth Itself?

Availability of information

Millennials are digital natives and have grown up in the information age. We can now find any information we want with a quick Google search and that includes information about investing. This abundance of information can give millennials and Gen Z the confidence in having the knowledge on investing.

However, it is important to be able to filter out what is accurate and up to date information when making an investment decision as there are many websites and blogs which are keen to promote their products and investment ideas. One must differentiate knowledge from wisdom and applied wisdom will keep one grounded and clear headed when making an investment, especially when it comes to high-risk investments. 

Always remember to ask yourself, is this in line with my investment objectives and can I afford to take this risk?

Be aware of greed and fear

Greed and fear relate to an old Wall Street saying: “financial markets are driven by two powerful emotions – greed and fear.”. This applies to cryptocurrencies as well. The fundamentals of investing are to buy low and sell high, but greed and fear has caused many investors to behave in the exact opposite manner.

For example, Bitcoin has delivered returns of 224% in 2020 alone. There are also many other cryptocurrencies in the market which have given even higher returns than bitcoin last year. These sky-high returns have encouraged many investors to invest in the crypto market in hopes of getting ever more returns.

As an investor, we must always remember that returns are never guaranteed and one must always remember to not let greed blind us to that fact.

When an investment has given you the returns which you have set for yourself, it is important to have the discipline to sell or lock in your profits. In this way, you can minimise your risk and will be able to enjoy the profits.

Are High-Risk Investments Suitable For Me?

High-risk investments can be part of one’s investment portfolio as they can help grow one’s wealth. However, it is crucial to have an understanding of the existing risks involved in high-risk investments and decide if it is aligned with your investment objectives. Finally, remember not to put all your eggs into one basket to ensure you minimise risk to your capital.

Do take note that your risk profile, commitments and requirements may also change through the years and you may want to adjust your investment portfolio and exposure to high-risk investments accordingly.

There are strategies you can employ to help manage your portfolio’s exposure to risks, minimising your risks whilst still offering exposure to the potential of sizeable gains. If this is something you find difficult to undertake alone, you can speak to a financial planner or advisor to learn more.

A financial planner offers a variety of services associated with wealth management, covering a large spectrum of services, from wealth generation, wealth protection, to wealth distribution and can serve as a professional in guiding one in investing their money.

About the Author

Nicholas Wong is a licensed financial planner of IPP Financial Planning Group that specialises in advising professionals and millennials to achieve their financial goals. He can be contacted at nicholas.wong@ipp.com.my

In the wake of the massive crash of the Luna stablecoin that brought the crypto industry to its knees, people everywhere are demanding justice. There are memes comparing it to the notorious Bernie Madoff, right next to McDonald’s job ads for those who lost their life savings.

Blame It On Stupid!

The creator of Luna which lost almost 100% of its US$40 billion value at one point, told the Wall Street Journal that it’s not a scam: “I made confident bets and made confident statements on behalf of UST because I believed in its resilience and its value proposition. I’ve since lost these bets, but my actions 100% match my words.”

He emphasized: “There is a difference between failing and running a fraud” (italics added).

There is an age-old wisdom called the Hanlon’s Razor which states: ‘Never attribute to malice that which can be adequately explained by stupidity’. What this means, reductively, is that not everything is a fraud. People can and do make dumb mistakes.

So don’t automatically assume that everyone is evil. The world is not out to scam you. Sometimes sh*t happens! You just have to accept that as a part of life.

If the Hanlon’s Razor is applied to the context of Luna, it suggests that stupidity is to blame: Not everyone is smart enough to manage a multi-billion-dollar crypto fund. Sorry to the investors who lost everything. Do you buy that?

Law enforcement investigations are now underway. Unfortunately for Luna, stupidity is not a great legal defence. There might not be an intent to defraud investors, but failure could mean negligence which is punishable by law. Were proper measures taken to safeguard investor monies? Was there a duty of care to do the right thing? Did they fail to do so, chose not to react in time, or were wilfully ignorant of the fallout?

Stupidity Is A Big Risk

What is not obvious to most investors, and which Hanlon’s Razor elucidates, is that that the risk of stupidity is as serious as the risk of scams! But investors tend to mix up the two even though incompetent or dumb management is a much more outspread problem than perceived. While scams are intentional, stupidity is not and generally can’t be helped (‘if you are dumb, you are dumb, so help you God’).

One reason is because so much of the crypto DeFi space is unregulated. DeFi or “decentralised finance” with their anonymous operations and offshoring structures are still beyond the reach of national laws. Furthermore, in a traditional financial firm, the management has to be ‘fit and proper’ with deep requisite experience and board oversight.

But with most DeFi projects, you are stuck with the founding team. Even if they can’t perform, you can’t fire or remove them. And while they claim to be decentralised, their decision-making flows often indicate otherwise.

We created a quadrant to illustrate this. In a very simplistic world where investment projects are ranked on two factors – only 1 in 4 (or 25% chance) have the rare combination of competency and virtue (green area). There is a possibility that 2 out of 4 projects (50% chance) are led by those who are incompetent, or by those with malice (red area). In other words, there is an equal chance of project failure due to either stupidity or scams.

Each quadrant can be profiled by these fictional ‘straw men’:

a. Smart + Evil: For instance, pure villains such as Gordon Gekko (the fabled Wolf of Wall Street) or Hannibal Lecter.

b. Stupid + Evil: This could be like the Dr. Evil and Mini Me characters, or the bumbling burglars in Home Alone movies.

c. Stupid + Good: A classic case is Forrest Gump, or when Mr. Bean tries to save the world.

d. Smart + Good: The most relatable is Ironman, a genius and philanthropist, in the Marvel Universe; or Dr. Manhattan in the DC Universe. 

For the Smart Investor, there are two things to take away from this. First, while there is moral hazard or malice everywhere, it particularly thrives in an unregulated environment. Second, never underestimate the power of stupidity. Dumb management can do a lot of damage. If you want to invest your life savings with a bunch of college dropouts and young punks who genuinely want to make the world a better place, please don’t cry fraud when you lose.

Disclaimer: Contents above are for educational purpose only.

About the Author

Edmund Yong is the managing partner of Celebrus Advisory and appointed by MDEC as part of its Talent Expert Network (formerly known as Digital Expert Panel) for blockchain technology. He is also the resident consultant for GLT Law, a multi-award-winning legal practice with specialisation in digital assets.

The Securities Commission Malaysia (SC) today launched the Sustainable and Responsible Investment linked (SRI-linked) Sukuk Framework (Framework) to facilitate fundraising by companies in addressing sustainability concerns such as climate change or social agenda, with features that relate to the issuer’s sustainability performance commitments.

With the accelerated shift towards developing a climate-resilient future, high-emitting industries are at a high risk of being phased out. The SRI-linked sukuk will enable companies in these as well as other industries to transition into a low-carbon or net zero economy. As at December 31, 2021, the global sustainable bonds outstanding exceeded USD1 trillion with sustainability-linked bonds making up USD118.8 billion [1].

The Framework is an extension of the initiatives under the SRI Roadmap that was introduced in 2019 to broaden SRI products offerings. More significantly, this initiative reflects the SC’s commitment to expand the reach of the Islamic Capital Market (ICM) to the broader stakeholders of the economy and build an enabling ICM ecosystem for the sustainability agenda.

The SC recognises that there are significant opportunities for the market to attract a more diverse issuer and investor base and undertake a wide range of sustainable projects.

The SC Chairman Dato’ Seri Dr. Awang Adek Hussin said, “The SRI-linked Sukuk Framework will encourage greater mobilisation of private sector and issuers’ financing towards sustainable development and meet the increasing global demand for sustainable financing. This is in line with the initiatives outlined in the Capital Market Masterplan 3 to reinforce Malaysia’s value proposition as the regional centre for Shariah-compliant SRI.”

Under the Framework, the proceeds raised can be utilised for general purpose, subject to the issuer committing to future improvements for sustainability outcomes within a predefined timeline, which will be monitored using key performance indicators (KPIs).

The financial characteristic or structure of the SRI-linked sukuk may be varied based on the success or performance of the issuer in meeting its KPIs and sustainability goals.

The Framework also provides greater transparency for investors by requiring issuers to appoint an external reviewer before issuance and an independent verifier postissuance to assess compliance with the framework and issuer’s sustainability performance which can be tracked by investors.

Further details of the requirements for the SRI-linked sukuk are set out in the Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework and the Guidelines on Issuance of Corporate Bonds and Sukuk to Retail Investors, which can be downloaded here.

[1] Source: Sustainable Debt Global State of the Market 2021, Climate Bond Initiative

About the Securities Commission Malaysia

The Securities Commission Malaysia (SC), a statutory body reporting to the Minister of Finance, was
established under the Securities Commission Act 1993. It is the sole regulatory agency for the regulation
and development of capital markets. The SC has direct responsibility for supervising and monitoring
the activities of market institutions, including the exchanges and clearing houses, and regulating all
persons licensed under the Capital Markets and Services Act 2007. More information about the SC is
available on its website at www.sc.com.my. Follow the SC on twitter at @SecComMy for more updates.

I still remember a business owner who asked my team to create his portfolio to make sure he would have enough money for his retirement. We advised that he could earn solid returns from a diversified global portfolio based on his financial profile.

He was assured that part of the strategy drawn up for him would spin out a good amount of cash on a regular basis. I convinced him to “buy” some sleeping pills and take a slightly higher level of volatility to achieve better capital growth.

A week after the meeting, he came back and said he was no longer interested in my portfolio because he had found a much better opportunity elsewhere. He said that a financial salesperson had explained to him that he could make more profit with lesser risk if he took another investment product.

All That Glitters Is Not Gold

A few years later, the same business owner revealed to me that the investment he had bought into performed terribly. It turned out to be more volatile than he had thought. It is no consolation to realize that he, along with others who had also bought into that product without taking a balanced look at all the facts, will suffer.

Remember all those expensive, slickly produced advertisements boasting market beating ratings and top quartiles? Contrary to what nearly everyone believes, you do not make money buying an investment just because it “looks good” on the surface.

Yeah, everyone is going to get rich washing Mercedes, and BMWs. How about slogans like “You can become a millionaire in three years”, “You can turn your financial dreams into reality”, “Amazing, fabulous, unbelievable strategies for building massive wealth”, “You can invest with the world’s blue chip funds with as little as…,” and so on?

Life is not all sunshine and lollipops. There will always be financial salespeople with sketchy reputation or those who will put their own interests before their clients. They are usually well spoken and persistent and like to target the most naive and least informed investors.

I have no desire to offend anyone. Speaking from my experiences, it is commonly believed that those working in the sales department of bigger institutions are compensated well because they make money for investors. Yet, some of their clients are getting worn down. Some are still losing money or making very little money after so many years.

Taking Advantage

I have seen investors saddled with unnecessary charges and lengthy lock-up periods. It is good for the seller but not the poor investor buying it. Some of these investors have absolutely no idea how badly they are being ripped off. Anyone with eyes and a brain knows what I mean.

So, you have been told not to worry just because your investment is being managed by the captain who has been dealing with multi millions or billions for a long time. Well, so what? Someone used to share with me that some fund managers should not be allowed to run a grocery store, let alone operate a billion-dollar investment vehicle.

Sorry to throw up at your party. There are some fund managers with poorer track records and far less skill but are managing far more money. Yet, some other great managers slip under the public’s radar because of the lack of publicity.

In my work, I love to find managers who have some limited capacity, so the big boys cannot compete against them. It is about sustainably higher returns for investors, not scale. Big is not beautiful here.

Many of you out there have been scammed, in one way or another, at some stage. Beware of financial schemes or money games guaranteeing anything from a few percent to double-digit returns within a few weeks or months. Financial scams are so popular because they take advantage of people’s fear, greed and ignorance.

The whole idea behind a scheme is that they do not want you to understand anything. Anyone can make any story out of thin air which is absolute nonsense. The fraudster allays your fears and provokes your greed, they entrap you by befriending you, and they say the investment is riskless then they talk about returns.

Betraying Your Trust

Some of the victims are professional business people because they are intelligent, they think they should understand what they are being told, so they go along with it. The people who sell them are often someone whom they know for a long time.

Fraudsters and operators of financial scams sometimes target business groups in order to find their victims. In some cases, members have innocently encouraged each other to put money into such schemes. Run like hell if someone is pressuring you to make a decision at any financial events.

Most of the modern schemes are versions of old frauds, first committed more than 100 years ago. They are known as Ponzi Schemes after a 19th century fraudster named Charles Ponzi who was offering a 50% return on investment in just 45 days.

Fraudster draws victims in by honouring the agreed interest for the first few installments, then drawing more and more money from them as they start to believe they are on to a sure thing. It is like “robbing Peter to pay Paul” as the fraudster pays the initial interest payments with the investments from other victims who have fallen for the scheme.

Always open your eyes. If you leave your head in the sand and ignore it, you are only going to be victimised.

About the Author

YH Wong has over two decades of experience in the financial services industry. His clients include high net worth investors and boutique institutions such as family offices and investment partnerships in the region. He is currently a senior partner with Satori Consultancy Ltd, a financial services company regulated by the Mauritian Financial Services Commission. He can be reached at yhwong@satoriconsultancy.com.

Back in 2018, the Managing Director of the Monetary Authority of Singapore (MAS) Ravi Menon, gave a speech about the future of crypto and cited an old concept in economics known as Gresham’s Law, which is loosely interpreted as ‘bad money drives out good money’.

He opined: “Like Money, crypto tokens can be a force for good or bad… It is the enchantment with these tokens as a way to make a quick buck and their abuse for illicit activities that are at the root of our concerns.”

Therefore: “We must work together – regulators and the crypto industry – to make sure that bad money does not take hold. And that a new generation of crypto tokens emerges, that harnesses the potential of blockchain technology for social good while mitigating the risks today’s tokens pose.”

Good Money vs. Bad Money

The original concept in Gresham’s Law is that in an economy where there are two currencies with the same face value, people will use up first the currency that is constantly devaluing (bad money), and hoard the currency that retains or increases in value (good money). 

For example, let’s say you are given equivalent amounts in both MYR and USD. As MYR keeps depreciating against USD, you will spend MYR first and hold USD in reserve. The so-called ‘bad money’ would be used for daily transactions and dominate circulation, while ‘good money’ would eventually disappear from circulation as it is kept for savings and long-term investment.

Imagine now that you are given BTC (bitcoin) instead of USD. If you expect that BTC will rise in value, you will not pay your daily expenses with BTC as you may lose out on its future valuation. This is one of the reasons why BTC has grown faster as a store of value than as a means of payment.

Going back to the MAS speech: Interestingly, it applies the concept to market conduct. It refers to the illicit use of crypto by bad actors in the market, along with the profusion and poor quality of crypto products as a form of currency. If these bad actors continue to flourish, they will crowd out and drive away the good actors. The crypto industry and its innovation benefits will suffer as a result. 

But if crypto can be used responsibly as a force for good, it will be ennobled and gain wide acceptance by the public. This would turn into the opposite of Gresham’s Law (known as Thiers’ Law) which states that ‘good money will drive out bad money’.

Is Private Money Good or Bad?

The characterisation of crypto as either good-or-bad is not always helpful. Private money like crypto, which are not issued by central banks, is very diverse and hard to generalise. Tech is morally neutral. They are self-serving financial constructs and are not mandated to be a public good. The vast majority of them are work-in-progress prototypes that will fail.

On one hand, you would read of industry reports claiming that illicit or criminal activity constituted only 0.10% (according to CipherTrace) to 0.15% (Chainalysis) of total crypto transaction volume in 2021, the lowest level ever. This makes crypto sound like a model private citizen!

But on the other hand, the crypto scandals keep getting bigger and bolder, with contagion impact on venture capital and lending companies as seen recently. The industry has spawned an entirely new genre of lawlessness (which Elliptic calls) “DeCrime” which could rewrite the penal code. Black hat hacks are commonplace, highly sophisticated, and even state-sponsored.

Ironically, as crypto improves and creates better version of themselves, they become too good to ignore. Savings and capital may leave financial systems, for good. Domestic banks may become undercapitalised. In response, governments are mulling to create crypto-versions of central bank digital currencies (CBDC), so that their national currencies will not be substituted by crypto. And they have the natural advantages to do so. As the Bank of International Settlements remarked, “anything that crypto can do, CBDCs can do better”!

Investors are at a unique point in economic history. They are spoilt for choice between private money (crypto) and public money (fiat), something that was unthinkable a generation ago. They have free capital movement, in the truest sense of the word, across borders, assets and entities. Whether this is ‘good’ or ‘bad’ is anyone’s guess.

Disclaimer: All opinions expressed above are the author’s own.

About the Author

Edmund Yong is the managing partner of Celebrus Advisory and appointed by MDEC as part of its Talent Expert Network (formerly known as Digital Expert Panel) for blockchain technology. He is also the resident consultant for GLT Law, a multi-award-winning legal practice with specialisation in digital assets.